Book Review: Financial Shenanigans by Dr. Howard Schilit

February 25, 2011 8:59 amby

I meant to post this concise book review on Financial Shenanigans, several months ago, right after I had read the book. I also had the privellege to conduct an interview with Dr Schilit, the author of the book. Below is the review followed by a link to the interview.

A company’s financial statements can be an investor’s best friend, or biggest foe. If read carefully, an investor can gain valuable insight into the company, however read without care and an investor can lose his/hers entire investment. As new accounting rules come up to prevent deceit and outright fraud, clever CEOs and top management have figured out ways to circumvent these rules.

Howard Schilit a leader in forensic accounting details how to catch the tricks CEOs try to pull, in “Financial Shenanigans”. The book was originally published nearly 20 years ago, however Schilit completely revamped, and updated the book with a ton of new data in a new edition which was released in April 2010.

What differentiates this book from most other books about “financial shenanigans” is that, Schilit arranges the book in a very clear and concise manner. The book is divided into two main segments; Earnings Manipulation Shenanigans, and Cash Flow Shenanigans.

1. Recording revenue too soon
2. Recording Bogus Revenue
3. Boosting Income Using One-Time or Unsustainable Activities
4. Shifting Current Expenses to a Later Period
5. Employing Other Techniques to Hide Expenses or Losses
6. Shifting Current Income To a Later Period
7. Shifting Future Expenses to an Earlier Period

The statement of cash flows has become the Holy Grail for many investors. Since the cash flow statement was made mandatory under FASB rules, many investors have shifted their attention from the income statement to the cash flow statement. The reason for this switch is that while there are numerous ways to fudge earnings numbers, it is much harder to do so with cash flow. Cash flow is simply a statement that states how much cash went into, and out of the business.

This book is a valuable resource tool. Most times when I am finished reading a book I will give it to a friend as a present. I plan on referencing back to Financial Shenanigans on future occasions as I read through company fillings. I am not the only one who thinks this book is great. As mentioned in this this article, Dan Loeb stated that Financial Shenanigans is a book “that you must read”.